SOME of the 347 microfinance institutions (MFIs) that lost their licences to operate are victims of the banking sector cleanup by the Bank of Ghana (BoG), the Member of Parliament (MP) for Bolgatanga Central, Mr Isaac Adongo, has stated.
He said the inability of the central bank to deal with the interrelated and interconnected effects of the banking sector clean- up was what led to most of these MFIs becoming insolvent.
Speaking in an interview with the GRAPHIC BUSINESS, he said the BoG should have ensured that the MFIs who had their funds locked up at the nine collapsed banks got a refund before withdrawing their licences.
He said the MFIs currently had about GH¢600 million locked up in the nine collapsed banks.
“You cannot start cleaning up a financial sector and hold everything constant and deal with banks. You need a strategic plan that identifies all the interrelated effects and make sure that as you clean up, you take care of them,” he stated.
BoG to blame
Over the period of the reforms, Mr Adongo said he had had cause to warn the central bank that its actions was going to generate what was going on now.
“The financial sector is an interrelated and interconnected sector so it is not one of those sectors that you can isolate one area deal with it as though it has no impact on the others.
“When you act in one sector, because it’s an interconnected sector and because the financial intermediation process that leads to what happens at the banking sector is a flow of the value chain within the financial sector, you will have rippling effects that you would have to deal with on an ongoing basis,” he explained.
He said that was what the central bank failed to do.
Mr Adongo stated that “microfinance institutions take money from micro depositors and they put some of the money into investments directly with the banks. They also put some in investments with savings and loans companies, rural banks and finance houses and the money goes back into the banking sector in terms of investments.”
“So when you collapsed UT Bank and Capital Bank, the first question you should ask is what is the impact of what I have just done on the rest of the intermediation process and address that,” he noted.
“But when you collapsed UT and Capital banks, fund management companies that took money from microfinance have their money there; savings and loans companies that took their money from microfinance have their money there and the MFIs themselves had their money there but you decided that your option to address this gap was to issue a 10-year bond which doesn’t provide immediate cash,” he stated.
He said the end result was that people also go to the microfinance companies and they didn’t get their deposits which created a confidence problem and panic withdrawals.
“You don’t come to address this liquidity problem, you delay it, and you pack it on the side and go on to collapse seven more banks, which created another round of panic withdrawals. People go to microfinance companies to get their monies and the money is not there because it’s locked up at CBG,” he said.
Creating insolvent institutions
Mr Adongo said the actions of the central bank had created insolvent financial institutions through the value chain.
“You have created insolvent financial institutions and have turned back to now close them for being insolvent,” he stated.
“There are miscreants in the microfinance sector but even for the most prudently managed microfinance institution, you will have to be a magician to survive three consecutive panic withdrawals in one year, with your money also locked up,” he added.
He said one of the collapsed MFIs had GH¢3 million locked up at CBG.
“These people come to you that they are unable to collect their monies and you descend to go and close them down,” he stated.